Near the middle of
the quarter I opened one of the many missives that I receive from various
brokerage firms, and I was struck by a headline that read "A Bumpy Road
Ahead for Investors".Now,
once in a while I get stuck on a particular phrase or statement, and I got stuck
on this one.I began to wonder:was there ever not a bumpy road ahead for investors?In fact, in 40-plus years in this business I can never recall any piece
of investment advice that said "smooth sailing from here on".Sure, there were puff pieces on individual stocks, but relating to the
market as a whole?Most
prognostications are more along the lines of "pavement ends".

Quarter-by-quarter
this past year, the Dow Jones has been plus 4%, minus 10%, plus 10% and plus 7%.
The S&P followed the same pattern, with slightly higher numbers in both
directions.

While you might
call that a bumpy road for investors, the end result (a double-digit gain) is not unappealing at all.Going forward there are many positive signs in the economy, and I am a
"glass-half-full" kind of guy.So
with corporate earnings pretty strong, housing sales perking up, and even
employment, the final piece of the puzzle, showing a little life, you would think that the road ahead might be
freshly paved and the gas tank full.Keep
in mind, though, that we have just finished two consecutive years of
double-digit gains.You should not
expect to see a third year gaining that much.Check your shock absorbers and watch out for potholes.

In last quarter's
letter I commented more than usual about bonds.I said that I had been trying to insulate our accounts by moving to
shorter-term bonds:it is an action
I had begun a couple of years ago, in anticipation of a turn up in rates.Today we are witnessing just how quickly interest rates can
move.Over the last eight weeks or
so, rates have risen by a full percentage point.

After a year in
which stocks and bonds both gained smartly, you may shrug off such a move--after
all, what is one measly percentage point?But
let me define the potential change in bond prices as rates rise:

In approximate
numbers, a one percent (100 basis points) rise in interest rates would mean that
a 30-year bond would lose around 12% of its market value; a 10-year bond would
lose 7%; a 5-year bond would lose 3%; and a 2-year bond would lose about 1%.The evidence of this has already shown up in my bond accounts.

But you can see
that the shorter maturities do offer some protection.The trade-off--and there is always a trade-off--is a lower yield on the
shorter paper.On the bright side,
as rates rise we should be able to reinvest in higher-yielding bonds.With fully half of all of our bond holdings maturing in from one to eight
years, our account yields can be expected to rise over that term.Hopefully, any hit to our market value will be minimal.Still, in fixed-income securities, the year ahead is likely to be
difficult; at the moment I have a "glass-half-empty" feeling about the
bond market.

The past year has
been good to us.And the new year looks to be starting on a more robust
economic note.While 2011 may well
prove to be more of a challenge than the year just past, I still have positive,
albeit muted, expectations.